Chapter 7 Flashcards
(9 cards)
Carolls Pyramid
Perspective of Neoclassical Economics on CSR
Based on Agency Theory (Jensen/Meckling 1979) studies argue that:
- CSR unnecessarily raises firms’ costs forcing the firm in a position of competitive disadvantage (Friedman, 1970; Aupperle et al., 1985; McWilliams and Siegel, 1997; Jensen, 2002)
- Employing firm resources to engage in CSR leads to significant managerial benefits rather than maximization of shareholder wealth (Brammer and Millington, 2008)
- At worst, CSR/ESG may just be a manifestation of the principal-agent problem
CSR and Financial Performance
Link between CSR & ESG and financial performance of firm contradictory results
New strand of literature
Understanding the role of capital markets as an intermediate mechanism through which CSR/ESG may be able to create long-term value
Socially Responsible firms
Ferrel et al. (2016) argue that effect of CSR on firm value depends on incentives of mgt
1. Firms with good corporate governance would be more likely to engage in value-enhancing CSR
2. Firms with bad corporate governance would be more likely to engage in value-destroying CSR
Renneboog and Liang (2017) firm´s CSR rating and the legal family to which its country origin belong are correlated
1. Firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings
2. civil law firms are more responsive to CSR shocks than common law firms
Value Implications of ESG
Khan et al. (AR, 2016) Find high KLD score firms to outperform market by 1.54%
KLD (now MSCI) that aggregates a corporation’s performance across stakeholders and seven themes
Firms using SASB materiality map
that score high on material and low on immaterial issues beat the market by 4.83% (annualized)
with good ratings on immaterial sustainability issues do not outperform those with poor ratings on these issues
Caveat that accurate guidance on materiality may be difficult to achieve (Berchicci & King, 2022)
CSR/ESG and access to Finance
Cheng et al (SMJ, 2014) hypothesize that because of lower agency costs through
1. better stakeholder engagement and
2. reduced information asymmetries through CSR reporting, firms with superior CSR performance will face fewer financial constraint
Purpose of financial performance
Gartenberg et al. (Org. Science, 2019) investigate whether employee beliefs in a strong corporate purpose are linked to superior or inferior financial performance
Differentiate between two types of high purpose firms:
1. High purpose-camaraderie organizations (score high on dimensions on workplace camaraderie)
2. High purpose-clarity organizations (score high on dimensions of management clarity)
High clarity purpose firms had superior future financial performance
driven by perception of middle management
Do consumers care about ESG
Servaes and Tamayo (2013) hypothesize that consumers are less likely to respond to CSR activities – even if they are aware of them – if CSR activities are not aligned with the firm’s reputation as a responsible citizen
Firms with high consumer awareness can enhance firm value by increasing CSR (low or negative for firms with low awareness), effect reverses for firms with poor prior reputation for being responsible citizens
Meier et al. (2023) use granular (Nielsen Retail Scanner) barcode-level sales data from US retail stores and show that (higher) ESG ratings
are positively related to local sales, especially in high income and Democratic-leaning households
of a firm’s product market rivals negatively affect a firm’s own sales
After major natural and environmental disasters, sales in counties located close to the disasters are found to become more sensitive to environmental ratings
Mutual fund and covid performance
Pastor and Vorsatz (2021)
investigate the hypothesis that investors are willing to tolerate the underperformance of actively managed equity funds because they believe that active funds outperform in periods that are particular important to investors (Moskowitz, 2000)
“Hedge against recession
Authors find that active funds underperform their passive benchmarks during the COVID-19 crisis 74.2% of active funds underperform S&P 500. Average underperformance is -29.1% on an annualized basis
Active funds performance during the COVID-19 crisis exhibits substantial heterogeneity
- Analysis of performance according to Morningstar sustainability rating (1 to 5 “globes”)
Funds with higher sustainability ratings have higher benchmark-adjusted returns during the crisis period! (Results are largely driven by environmental sustainability)
- Active funds with high sustainability ratings and funds that apply exclusion criteria in their investments suffer less outflows (roughly zero) compared to funds with low sustainability ratings (outflows of 2.6%)
Contrary to the neoclassical theory, the authors find that investors keep their commitment to sustainability during the crisis period, suggesting that investors have come to view sustainability as a necessity!
Green Bonds
Positive overall effects driven by (Tang and Zhang, 2020 & Flammer, 2021):
− Lower financing cost, but minor in economic terms (yield spread on average about 7 bp lower)
− Investor attention (institutional (long-term) investors increase, hedge funds decrease holdings)
− Media attention (Google search volume spikes on issue dates)
− Firm fundamentals (risk mitigation)
− All these findings suggest that corporate green bonds serve as a credible signal of companies’ commitment towards the environment
